India’s Economic Growth Slows Sharply, Manufacturing and Consumption Decline

India’s economic growth decelerated significantly in the third quarter, falling short of expectations due to weaker performance in manufacturing and consumer spending. The slowdown may increase pressure on the Reserve Bank of India (RBI) to consider interest rate cuts.

Data released on Friday showed that the gross domestic product (GDP) of the world’s fifth-largest economy expanded by 5.4% year-on-year in the July-September period. This marked the slowest growth in seven quarters, lagging behind a Reuters poll forecast of 6.5% and lower than the 6.7% growth recorded in the previous quarter.

The gross value added (GVA), a steadier measure of economic activity, also exhibited slower growth at 5.6%, down from 6.8% in the preceding quarter.

Chief Economic Adviser V. Anantha Nageswaran described the growth numbers as disappointing, attributing the downturn to global challenges. “The bulk of the slowdown has been predominantly due to the manufacturing sector. Some of it is also due to the presence of excess capacity elsewhere and imports dumping in India,” Nageswaran stated. He particularly pointed to a surge in imports of cheap steel from countries like China, Japan, and South Korea.

The manufacturing sector bore the brunt of the downturn, with its year-on-year growth plunging to 2.2% from 7% in the previous quarter. Suman Chowdhury, chief economist at Acuite Ratings, noted, “The economy has hit a bump on its post-pandemic recovery path, with a much slower manufacturing sector and mining sector dragging down growth prospects.”

Urban inflation, hovering around 6%, has eroded demand for consumer goods ranging from soaps and shampoos to automobiles. Private consumer spending, a critical growth driver, rose by 6.0% compared to the same period last year but was weaker than the 7.4% growth recorded in the prior quarter.

Government spending increased by 4.4% year-on-year during the July-September quarter, contrasting with a 0.2% contraction in the previous quarter. Meanwhile, agricultural output showed resilience, expanding by 3.5%, up from 2% growth in the prior quarter, buoyed by a favorable monsoon season.

Despite these challenges, Nageswaran emphasized the economy’s resilience and highlighted rural demand as a supporting factor for growth.

Corporate earnings during the quarter offered early signs of the slowdown. Over half of the 44 firms in the blue-chip Nifty 50 index failed to meet or just met analysts’ expectations, according to data from LSEG. Key companies such as Maruti Suzuki, Nestle India, and Hindustan Unilever reported sluggish urban consumption in the September quarter.

Data from Citi revealed that inflation-adjusted wage growth for listed Indian firms—a proxy for urban earnings—remained below 2% throughout 2024, significantly lower than the 10-year average of 4.4%. This slower earnings growth has also led to record foreign outflows, with nearly $12 billion being withdrawn from Indian equity markets in October.

The latest GDP figures have heightened market expectations for a potential rate cut by the Reserve Bank of India. Bond yields and overnight index swap rates, both indicators of interest rate trends, fell following the GDP report.

Some economists believe the RBI might move as early as December. “Post today’s GDP print, there is a high probability of an RBI rate cut in December,” remarked Gaura Sen Gupta, an economist at IDFC First Bank.

Calls for lower interest rates have also come from India’s finance and trade ministers, who argue that reduced borrowing costs could boost industrial investment and capacity-building. However, Nageswaran refrained from offering direct policy recommendations. “All of us see the data, the central bank is also seeing the data. They know what to do, and I will not be commenting on this question,” he stated.

The RBI’s Monetary Policy Committee (MPC) had kept the benchmark repo rate unchanged at 6.50% during its last meeting, citing persistently high inflation while shifting its policy stance to “neutral.” The central bank, which last cut rates in May 2020, is set to announce its next policy decision on December 6.

India’s economic performance underscores the challenges of sustaining recovery momentum amid global and domestic headwinds. The confluence of sluggish manufacturing growth, weaker consumer spending, and rising inflation poses significant hurdles for policymakers as they navigate a delicate balance between spurring growth and maintaining price stability.